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Energy efficiency depends not only on the availability of energy efficient technologies, but also whether people adopt them and how they are used. New research shows that energy conservation programs motivated by behavioral science are relatively cost effective.

What Behavioral Science Has to Say About Energy ConservationHunt AllcottApril 9, 2010

To combat climate change, many economists and policymakers advocate price-based approaches, such as greenhouse gas emissions taxes and emissions trading programs, or technology-based approaches, such as R&D subsidies and public-private R&D partnerships.In the end, however, both types of approaches rely on consumers and firms to make different choices: they will need to change what they do and what they buy in response to increases in the relative prices of carbon-intensive goods. A growing body of research in psychology and behavioral economics suggests that non-price interventions can be just as powerful as prices in changing consumer choices.

Historically, energy efficiency has been a leading example of the difficulties in inducing people to change behaviors and adopt new technologies, even when it appears to be in their own financial interest. The great potential for energy efficiency has been detailed in consistently optimistic language over the past 30 years. Investments in fluorescent light bulbs and new insulation appear to pay for themselves very quickly. For example, a recent consulting report concluded that many households and businesses in the United States have yet to take such relatively straightforward measures, even though doing so could reduce energy consumption by 23 percent from the baseline and earn $1.2 trillion, more than double the up-front cost of $520 billion.

Compared to these possibilities, however, the actual penetration of energy-efficient technologies and behaviors has been strikingly low. Although there are many reasons for this, prices and technology are certainly not the only barriers to increased energy efficiency.

In the past 15 years, a series of hundreds of partnerships between behavioral scientists and partner organizations—including governments, NGOs, and private-sector businesses—have generated non-price interventions with increasingly compelling results. These partnerships have arisen in a variety of domains, including retirement savings, microfinance, economic development, and health—as well as in energy use and environmental behaviors. Some programs have proven remarkably powerful: in one case, a company worried about its employees’ retirement savings, introduced a behaviorally motivated program that increased employees’ average savings rate by 400 percent. Crucially, behavioral interventions are often much less costly to implement than other common approaches to greenhouse gas emissions abatement, such as R&D for energy technologies or replacement of fossil-fuel based electricity generation with renewables.

The Power of Non-Price Interventions in Energy Conservation

Energy conservation programs based on approaches other than changing relative prices have been studied in a large body of ongoing research on social approval, consumption feedback, goal setting, commitment, and other mechanisms. Although many of these were small-scale, short-term pilot studies on nonrepresentative populations, they do show proof of concept.

Recent work by OPOWER, an energy-efficiency software and consulting firm, shows this concept can be realized at scale. During the past two years, OPOWER has partnered with utilities in Northern and Southern California, Washington, Minnesota, Illinois, Colorado, Virginia, and other states to send energy use reports to residential electricity and natural gas consumers. The reports display the household’s energy consumption, compare it to similar households over time, and provide energy conservation tips. The social comparisons are based on research that showed that descriptive social norms are better at reducing energy use than appeals to saving the environment and to social responsibility (despite the fact that many households claim that social norms have little influence on their behavior).

OPOWER’s pilot programs were designed for rigorous evaluation: from a population of households in the utility’s service territory, some are randomly selected to receive the report letters, while the rest remain as a control group. Comparing the electricity bills of the treatment and control groups gives a clean estimate of the actual energy conservation caused by the reports. Such analysis shows that OPOWER’s reports prompt households to reduce energy use by about two percent, depending on the program’s location, frequency, and duration.

Economists would point to “social learning” and “conditional cooperation” as two reasons why social comparisons could cause people to conserve energy. Social learning means that a homeowner who learns that his or her neighbors are using much less energy might infer that he also has low-cost opportunities to conserve. Conditional cooperation means that people are more likely to contribute to public goods, such as moderating global climate change, when informed that others are contributing.

Results also show that households that were high energy consumers before the OPOWER program conserve substantially more than households whose baseline consumption was low. The heterogeneous treatment effects imply that “profiling,” or targeting future treatment toward high-energy-using households, could markedly improve cost-effectiveness.

Interventions that encourage adoption of energy-saving technology and behaviors can be highly cost effective: a nationally scaled program similar to OPOWER’s program in Minnesota could cause energy conservation at a cost to the utility of 2.5 cents per kilowatt-hour (kWh) saved. This compares very favorably with estimates of the average cost of other energy-efficiency programs, which in two recent studies range from 1.6 to 3.3¢ and 5.5 to 6.4¢ per kWh. If scaled nationwide, a program like this could reduce U.S. carbon dioxide (CO2) emissions from electric power by 0.5 percent, while actually saving $165 per metric ton of reductions. This compares very favorably with other, more traditional strategies to reduce carbon emissions; wind power, carbon capture and storage added to new coal power plants, and plug-in hybrid vehicles are estimated to cost $20, $44, and $15 per metric ton of CO2 abated.

There are three key policy implications of this discussion. First, governments can provide funding for potentially high impact behavioral programs as part of their broader support for energy innovation. A bill under consideration in the U.S. House of Representatives, HR 3247, would establish a program at the Department of Energy to understand behavioral factors that influence energy conservation and speed the adoption of promising initiatives.

Second, through market incentives, policymakers can encourage—or fail to encourage—private-sector firms to generate and utilize behavioral innovations that “nudge” consumers to make better choices. Historically, economists and policymakers have focused on how regulation affects relative prices—for example, how emissions caps or taxes on pollution-intensive goods affect the prices firms set.

In practice, however, firms interact with consumers in many ways in addition to pricing. Utilities, for example, can give consumers clear or opaque information about energy-efficient goods, can make it easy or difficult to find out about energy-efficiency promotions, and can otherwise nudge consumers in ways that cause them either to increase or decrease consumption. “Decoupling,” a regulatory change that separates electricity retailers’ profits from quantities sold, is one mechanism that could encourage firms to nudge consumers toward reducing energy use. Another policy mechanism, now common in many states, is energy efficiency resource standards (akin to renewable portfolio standards), which require utilities to document that they are inducing energy conservation.

Third, government agencies often provide independent information disclosure, such as vehicle and appliance energy-efficiency ratings. This helps catalyze private-sector innovation by allowing firms to credibly convey the financial value of energy efficiency to consumers. The effect of information on choices, however, depends critically on how the information is conveyed, and government agencies should carefully consider behavioral factors in the disclosures they control. For example, rating fuel economy in miles per gallon (MPG) can mislead consumers. This is because most people reflexively think that annual fuel use and fuel costs increase linearly in miles per gallon, while in reality they do not. For example, increasing a 14 MPG vehicle to 17 MPG saves the same amount of gasoline and money as increasing a 33 MPG vehicle to 50 MPG.

Persuasion vs. Nudging

I’ll conclude by drawing a distinction between “persuasion” and “nudging.” Persuasion is an attempt to influence people to do what the persuader wants—buy a product, conserve energy, reuse hotel towels, and so on. Nudges are attempts to help people to get what they themselves want, but don’t get because of mistakes that all humans make. Utilities marketing energy efficiency programs are rightly focused on persuasion. But policymakers should be careful to remember that the goal is not to minimize society’s energy consumption—we could do that immediately by shutting off all of our power plants. Instead, the goal is to make people as well off as possible overall. While pushing energy efficiency and green energy programs is appealing, I would advocate that policymakers proceed by identifying market failures—potentially including mistakes that consumers make and additional information they would find useful—and introducing policies to address them directly.

Hunt Allcott is an assistant professor in the Department of Economics at New York University, currently on leave as the Energy and Society Fellow in the Department of Economics at the Massachusetts Institute of Technology.